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In the clamor to get lawyers to do more to prevent future business fraud, one party has been noticeably reticent: the American Bar Association. While politicians, regulators, and shareholders have all been eager to impose greater responsibilities on corporate attorneys, the ABA has fought to maintain the status quo. But at its annual meeting in August, the association finally joined the bandwagon. Delegates approved several modifications to the association’s model rules of professional conduct that give lawyers greater freedom to report financial fraud by a client. The most controversial change � one that ABA delegates narrowly passed on a 218-to-201 vote � adds an exception to attorney-client privilege. The new rule permits a lawyer to reveal confidential information if a client used the lawyer’s services to commit a fraud that caused “financial harm.” Previously, an attorney could breach privilege only in rare instances, such as if a client’s actions led to death or physical injury. The ABA’s model rules serve as a recommendation to the states, which actually govern the practice of law. Each state is free to take its own path on lawyer regulation, and indeed, 42 already allow a financial harm exception to attorney-client privilege. New ABA president Dennis Archer admits that his group is a Johnny-come-lately on the issue. Up to now, he says, “We had not taken the leadership role that we needed to.” In fact, the bar association rejected a similar rule change two years ago. However, Archer says, “that was before the Enrons and WorldComs and other problems.” He says that the recent wave of corporate scandals led ABA members to realize they had to act “out of respect for investor confidence.” He adds that ABA members felt more comfortable supporting the rule change this year because “no gory-detail stories” had emerged in the states that already have the financial harm exception. Reporting Up, Reporting Out The ABA also amended its model rules to require a company’s lawyer to report fraud up the management ladder. If company officials fail to address the attorney’s concerns, then the lawyer can go to outside authorities. While “reporting up” is mandatory, “reporting out” is voluntary. According to Alfred Carlton, the ABA’s immediate past president, the U.S. Securities and Exchange Commission is considering a reporting out requirement, but has been waiting for the bar association to act first. By changing its rules to allow for voluntary reporting out, the ABA hopes to stave off a mandatory requirement from the SEC. (The agency declined to comment.) A third proposal passed by ABA delegates endorses structural and procedural reforms to improve corporate governance. It includes a recommendation that a company’s GC meet regularly in executive session with a group of independent directors to discuss legal compliance matters.

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